“Practical completion” considered by Court Appeal for first time in 50 years

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It is well known that practical completion is often easier to recognise than it is to define, which is why the Court of Appeal’s judgment in Mears Ltd v Costplan Services (South East) Ltd and others is an important read for construction practitioners.

It was an appeal from Waksman J’s December 2018 judgment, which was dismissed, and is the first time in 50 years that the Court of Appeal has considered the meaning of “practical completion”.

Mears Ltd v Costplan Services (South East) Ltd and others

By an agreement for lease (AFL) between the appellant (Mears, as the tenant), the second respondent (PNSL, as the landlord) and the third respondent (Pickstock, as the developer), Mears agreed to take a 21 year lease from PNSL of two blocks of student flats in Plymouth for an annual rental of £1,666,667 following the completion of their construction.

Key clauses of the AFL included:

  • Clause 13.7.2, which provided that if a certificate of practical completion had not been issued by 11 September 2018 (a date which was subsequently extended in the course of the proceedings to 18 September 2018) (the longstop date), Mears or PNSL could give notice of termination.
  • Clause 14.4, which provided that the issue or non-issue of a certificate of practical completion was to be in the “sole professional discretion” of the first respondent (Costplan, the employer’s agent).
  • Clause 6.2.1, which prohibited PNSL from making any variations to the works which materially affected the size of the rooms. It stated that a reduction in size of more than 3% from the sizes shown in the contract drawings was deemed to be material.

Clause 2.17B.2 of the building contract between PNSL (as employer) and Pickstock (as contractor) required Pickstock to design, carry out and complete the works in conformity with, among other things, third party agreements (which included the AFL).

The works, which started in the middle of 2016, were delayed. In the late summer of 2018, Mears alleged that some of the rooms in the flats were more than 3% smaller than specified. However, by then the works were complete, the rooms had been built, and the long stop date was less than a month away.

At first instance

Notwithstanding Mears’ complaints, Costplan indicated that it intended to issue a certificate of practical completion. Mears sued Costplan, PNSL and Pickstock. It sought and obtained an interlocutory injunction restraining Costplan until trial from issuing the certificate, and claimed declarations, including a declaration that, on the proper construction of the AFL, any reduction in room size exceeding 3% was, of itself and without more, a material variation, and therefore a material breach of contract, which prevented practical completion from being certified.

It was common ground that, if Mears could establish that any of the rooms had been built more than 3% smaller than specified, these were breaches of the AFL which were, for practical purposes, irremediable (since there was no prospect of the tower blocks being demolished and re-built). If Mears’ construction was correct and practical completion could not be certified as at 18 September 2018, then as Waksman J put it, Mears “could terminate its agreement for lease and effectively walk away”, leaving PNSL, having financed the construction of the works over a period of 2 years or more, with a completed property, but no tenant, and lost rental income of £35 million.

Waksman J found that 56 rooms had indeed been built more than 3% smaller than specified. But he refused to grant the declaration Mears had sought. He held that Mears’ argument was wrong as a matter of construction, and “commercially absurd”.

In the Court of Appeal

Coulson LJ, who gave the leading judgment, and with whom Newey and Lewison LJJ agreed, took the same view as Waksman J.

Coulson LJ accepted PNSL’s argument that Mears’ case was “absolutist”, and that the deemed materiality identified in clause 6.2.1 related to the reduction in room size, not the consequent breach of contract. It would be “commercially unworkable” if every departure from the contract drawings, regardless of the reason for and the nature and extent of the non-compliance, had to be regarded as a breach of contract preventing practical completion. In deeming a reduction in size of more than 3% as “material”, the parties were simply identifying what counted as a prohibited variation and, therefore, a breach of contract.

However, it did not follow that they were deeming that the consequent variation and breach was itself material. Whether such variation and breach was so material as to preclude the issue of a certificate of practical completion was a matter of fact and degree in each case. Moreover, there was no question of PNSL seeking to profit from its own breach within the principle set out in Alghussein v Eton College since it was not PNSL that was seeking to terminate.

What does practical completion mean?

That was sufficient to dispose of the appeal, but Coulson LJ went on to provide a helpful review of English and Commonwealth authorities on practical completion, from which, consistent with the submissions of PNSL, he distilled the following propositions:

  • Practical completion is easier to recognise than define.
  • The existence of latent defects cannot prevent practical completion, since nobody knows about them.
  • In relation to patent defects, there is no difference between an item of work which has to be completed (that is, an outstanding item) and an item of defective work which requires to be remedied. Snagging lists can, and will usually, identify both.
  • Although one interpretation of the speeches of Viscount Dilhorne in Jarvis & Sons Ltd v Westminster Corporation [1970] 1 WLR 637 and Lord Diplock in Kaye v Hosier & Dickinson [1972] 1 WLR 146 suggest that the mere presence of any patent defect prevents practical completion, that was emphatically not the view taken by Salmon LJ in Jarvis in the Court of Appeal [1969] 1 WLR 1448, who, more flexibly, had suggested that practical completion meant:

“… completion for all practical purposes, that is to say, for the purpose of allowing the employers to take possession of the works and use them as intended.”

  • HHJ Newey QC had done much to apply the decisions in Jarvis and Kaye in a practical fashion in H W Nevill (Sunblest) Ltd v William Press & Son Ltd (1981) 20 BLR 78 and Emson Eastern Ltd v EME Developments Ltd (1991) 55 BLR 114. His approach as to the nature of practical completion has been adopted in all the subsequent cases.
  • The decision of the Hong Kong Court of Final Appeal in Mariner International Hotels Ltd v Atlas Ltd [2007] 10 HKCFAR 1 was a helpful summary of HHJ Newey QC’s practical approach. In that case, the court held that practical completion was a state of affairs in which the works have been completed “free from patent defects, other than ones to be ignored as trifling”.
  • Whether or not a defect is trifling is a matter of fact and degree, to be measured against “the purpose of allowing the employers to take possession of the works and to use them as intended” (per Salmon LJ in Jarvis). However, this should not be elevated into the proposition that if a house can be inhabited or a hotel opened for business, the works must be regarded as practically complete, regardless of the nature and extent of the items of work that remain to be completed or remedied. Accordingly, HHJ Thornton QC’s observations on the meaning of practical completion in Bovis Lend Lease Ltd v Saillard Fuller & Partners (2001) 77 Con LR 134 were disapproved.
  • The fact that a defect is irremediable does not of itself preclude the achievement of practical completion; and certainly Ruxley Electronics & Construction Ltd v Forsyth does not support the contrary view.

So far as the last bullet was concerned, Coulson LJ accepted PNSL’s submission that it is irrelevant to the issue of practical completion whether the defect in question is irremediable. What matters is whether it is trifling. Such a conclusion was broadly consistent with Ruxley.

Andrew Rigney QC and Dermot Woolgar appeared for PNSL and were instructed by Silver Shemmings Ash LLP.

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